June 15 is this week, which means if you don’t have taxes taken out regularly from your paycheck, you need to write Uncle Sam a check soon.
America’s taxes are pay-as-you-go, so you must pay most of your tax during the year as you receive income, rather than paying at the end of the year.
There are two ways to pay tax: withholding taxes from your pay, your pension, or certain government payments, such as Social Security, or making quarterly estimated tax payments during the year.
The first payment covering Jan. 1 through March 31 was conveniently due on the tax deadline, April 18, and the second one covering April 1 through May 31 is due June 15. The third and fourth payments are due in September and January 2024.
If you don’t make timely payments, you’ll be penalized and end up paying more.
But how do you know how much you need to pay and if you even must pay? This guide will break it down for you and give you tips to make sure you’re following the law:
Who must pay quarterly estimated taxes?
Who pays? Usually, it’s self-employed individuals, gig workers, retirees, investors, businesses, corporations and others who don’t have taxes withheld; or it’s employees who don’t have enough taxes withheld by their employers throughout the year who will pay quarterly estimated taxes. Estimated tax is used to pay income tax plus self-employment tax and alternative minimum tax.
Even if you have taxes withheld from your paycheck, taxes also must be paid on income that’s generally not subject to withholding such as interest, dividends, capital gains, alimony and rental income.
A rule of thumb to know if you must file quarterly individual estimated tax payments is if the following apply, according to the IRS:
◾ You expect to owe at least $1,000 in tax for the current year after subtracting your withholding and refundable credits.
◾ You expect your withholding and refundable credits to be less than the smaller of: 90% of the tax to be shown on your current year’s tax return; or 100% of the tax shown on your prior year’s tax return. (Your prior year’s tax return must cover all 12 months.)
There are special rules for:
◾ Farmers and fishermen.
◾ Certain household employers.
◾ Certain higher-income taxpayers.
◾ Nonresident aliens.
They should consult IRS Publication 505, Tax Withholding and Estimated Tax.
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When are estimated taxes due?
You could’ve paid the full-year estimate when you filed your taxes on April 18, otherwise, they are due quarterly. This year the dates are:
◾ 1st payment: April 18.
◾ 2nd payment: June 15.
◾ 3rd payment: Sept. 15.
◾ 4th payment: Jan. 16, 2024.
You don’t have to make the payment due Jan. 16, 2024, if you file your 2023 tax return by Jan. 31, 2024, and pay the entire balance due with your return.
How do I know how much I owe?
Form 1040-ES, Estimated Tax for Individuals, includes instructions to help taxpayers figure out their estimated taxes.
Publication 505, Tax Withholding and Estimated Tax includes worksheets and examples that can be helpful to those with dividend or capital gains income; those who owe alternative minimum tax or self-employment tax; or special situations.
“If you’re not sure what your total income is going to be for the current year, simply take your last year’s tax liability and split it into four equal parts and use those for your estimated tax payments,” said Mark Steber, chief tax information officer at Jackson Hewitt Tax Services. “You may still owe next year when you file, but you won’t owe the underpayment penalty.”
For those who aren’t sure if tax withholdings from their paychecks are sufficient to cover their tax obligations, they can use the IRS’ Tax Withholding Estimator tool to check if the right amount is being withheld.
If you discover too much is withheld, you can make the adjustment with your employer, which will result in larger paychecks during the year and a smaller refund. Conversely, if too little is withheld, you can adjust the withholding, so your tax bill is smaller at tax time though your regular paycheck may be smaller.
How should I make my quarterly estimated tax payment?
You may send estimated tax payments with Form 1040-ES by mail (postmarked by the due date), pay online, by phone, or from your mobile device using the IRS2Go app. If paying by check, taxpayers should be sure to make the check payable to the “United States Treasury.”
The best way to make a payment is through the IRS online account, according to the IRS. There taxpayers can see their payment history, any pending payments and other useful tax information. Taxpayers can make an estimated tax payment by using IRS Direct Pay;Debit Card, Credit Card or Digital Wallet;or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS).
You can visit Payments to view all payment options.
What if I don’t pay?
If you don’t pay your taxes, you’ll end up owing more when you file your return in April. You may be charged interest or a penalty for paying too little tax during the year.
The penalty is imposed on each underpayment for the number of days it remains unpaid. A penalty may be applied if you didn’t pay enough estimated tax for the year or you didn’t make the payments on time or in the required amount. A penalty may apply even if you have an overpayment on your tax return.
You can avoid the penalty if you owe less than $1,000 in tax after subtracting withholdings and credits; paid at least 90% of the tax for the current year; or 100% of the tax shown on the return for the prior year, whichever is smaller.
The IRS may waive penalties if:
◾ You were a victim of a casualty, disaster, or other unusual circumstance.
◾ You’re at least 62, retired, or became disabled this year or last year, and your underpayment was due to “reasonable cause” rather than “willful neglect.”
Need more help?
Tax help is available 24/7 on IRS.gov, which has tools like the Interactive Tax Assistant, Tax Topics and Frequently Asked Questions to get answers to common questions.
